Why This FOMC is Different From Sept

Tomorrow will mark exactly three months since the Fed surprised the market with no taper. This time the market is ready for anything. On Tuesday, the yen was the top performer while the Australian dollar lagged. Japanese trade balance is part of a light Asian calendar ahead of the Fed decision.

The market can change in the three months. The September 18 FOMC decision was a 'close call' not to taper and the December 18 decision will probably be the same but there is one big difference. This time traders are far less confident in any outcome. The market whipsawed after the last decision as confused traders hit the panic button. This time look for a measured, sustained response.

The lack of confidence in the FOMC was evident on Tuesday. The main trade was to fade what has worked recently; that meant declines in yen crosses, stocks, gold and shortcovering in bonds. An attempt was also made to knock down the euro but, once again, it rebounded from the dip to 1.3723 up to 1.3770. The resilience of the euro has been a major theme in 2013 and the lack of a taper could mean EUR/USD ends the year at the highs.

One trend that didn't pare back on Tuesday was weakness in the Australian dollar. The Aussie has fallen for eight consecutive weeks and is on the way to making it nine after a break below 0.9000 for the first time since August. Aside from broad risk aversion, one reason for AUD/USD selling was an upcoming speech from RBA Governor Stevens. His early comment don't contain an additional AUD jawboning, he says the FX rate has behaved as expected by declining.

Another interesting move ahead of the Fed was a drop in EUR/CHF as the pair broke below 1.22 for the first time since May. The market has little doubt in the credibility of the SNB to hold the 1.20 floor so the downside risks are minimal.

Other events on the calendar include November Japanese trade balance at 1850 GMT. Expectations are for a 1.35 trillion yen deficit but the important part will be growth in imports and (especially) exports. The consensus is for an 18% rise in exports and 21.4% y/y rise in imports.